457b Plan: Every Teacher Should Have One
A 457b is a tax-deferred retirement plan. This plan allows individuals to save funds for retirement while also placing funds aside to supplement funds from their pension.
Although many are uninformed about the plan, most educators have access to a 457b plan. In a way that is like a 403b plan, the 457b plan allows educators to invest a yearly maximum of $19,500.
If you combine this with the 403b plan, teachers are given a chance to invest $39,000, tax-deferred, each year.
This plan allows teachers to double down on their retirement savings. Additionally, the 475b plan allows individuals to access their funds when they separate from their employer, regardless of their age. Let’s talk about all things 457b!
So… What Exactly is the 457b Plan?
The 457b plan is a retirement plan that is tax-deferred and offered to individuals that work for state and local government agencies.
Investments that are made to a 457b plan are taken out, pre-tax, from your paycheck. These investments will then grow in your investment account, tax-deferred.
Benefits to a 457b Plan
Most importantly, when you invest in a 457b plan, you can access these funds as soon as you separate from your employer. This means you can access your fund without the 10% early withdrawal penalty. This is ideal for any teacher that is considering retiring from their career early. It is important to know that this penalty-free, early access is only available with the 457b plan, not the 403b.
When you contribute to a 457b plan, you are contributing money pre-tax. This allows you to maximize the money you are investing. When the time comes to withdraw funds, you will pay taxes on your contributions and capital gains.
457b plans also reduce your current taxable income each year you contribute to the fund. This means that you will not have to pay as much in income tax, but you are also paying yourself towards retirement. Win, win situation!
Another great feature of the 457b plan is that the money is directly deducted from your payroll. This is desirable as it means you are paying yourself first thing every paycheck. When you have funds automatically invested for you, it makes you more likely to stick to your individual financial goals.
The 457b plan can allow for large contributions to your savings for retirement. This plan can be combined with other retirement accounts to maximize savings. As a teacher, you most likely have access to both the 457b plan and the 403b plan. This allows you to contribute double the amount of pre-tax money.
Stay Informed About Your 457b Plan
As with any financial decision, it is very important to understand what you are investing in and how the process works. This goes for retirement plans as well. Below are some of the topics you should keep when looking to invest in a 457b plan.
When it comes to contribution limits, the IRS determines these annually. For the year 2020, the yearly maximum is $19,500 for a 475b retirement account. Although, if you are over the age of 50, the maximum is $26,000.
Finally, if you are within three years of your scheduled retirement, there is a catch-up provision written into the plan that allows you to invest the less of:
- Double your current annual contribution.
- The basic annual limit plus the amount of the basic limit that has not been used in previous years. This is only allowed if you are not using the over 50 catch-up contributions.
Rules about Withdrawing Funds
If you choose to stay with your employer, you are not able to withdraw funds from your plan until you reach 59.5 years of age.
If you choose to separate from your employer, you have access to your funds without early withdrawal penalties.
If you have not started withdrawing funds by age 70.5 you are required to start.
When it comes to choosing a vendor for your 475b plan, it all depends on what type of product you want. The typical products for a 457b plan are annuities and mutual funds.
As we stated earlier, the typical products for a 457b plan are annuities and mutual funds.
A mutual fund is an investment portfolio that brings money together and invests in groups of stocks and bonds.
Annuities are contracts between insurance companies and employees in which employees make payments to the company in return for payment. These payments can be either paid in a lump sum or through disbursements.
Things to Watch Out For
If you decide that investing in a 457b plan is right for you, then it is important to watch out for certain things and make sure you do not fall into a trap. Like high fees, or poor vendor or product selection
The Bottom Line – Speak With An Advisor At National Educational Services
As an educator, investing in a 457b plan is a great idea. The plan offers many benefits and allows for flexibility, as early withdrawal is not penalized. Speak with an advisor at National Educational Services to learn more information.